Loopt is on a pay service; they don't need money from ads because they're not a "free" service, but check out all the web-based ones: Zenter was bought by Google, so advertising applies, as mentioned. Xobni hasn't released anything yet, but once they have something, we'll see if there are ads, and if an ad-based company acquires them. Heysan will need to make money at some point -- obviously if you don't mind operating at a loss then you don't need income from ads, but deficit operations can't last. Going public is extremely unlikely so both Xobni's and Heysan's investors presumably invested based on an expectation of acquisition, probably by a large ad-based company. Justin.tv? "There are a number of ways to advertise on Justin.tv - both within the show itself and on our webpage" (from the FAQ). Even the site you're reading now is financed with money made from advertising dollars, since Viaweb was bought by Yahoo and that sale is what's paying the bills around here (and so by extension, all YC companies are initially financed by ads, too; and doubly so when Paul Buchheit of GMail and AdSense fame is one of the investors, as with Auctomatic).
The whole topic reminds me of Feynman's story about his father teaching him about how life on Earth moves because the Sun shines.
Advertising revenue is the solar energy incident on Earth of the web.
Okay, okay, you took my specific examples and hammered them into the ground. I probably muddled up what I meant. Look at the whole picture.. YC companies intrinsically create value for users, not show ads, as their primary function. What that means is, I doubt any of them are going "Okay, what can I make to show off these awesome ads?" Instead they're going, "Okay, how do I make this useful to a large number of people?" Then when they've accomplished that, only then do they think about ads. Reddit was a perfect example. They didn't even put ads up 'til post-acquire. Yes, ads are a bodily function for web startups, but it is not their primary function.
That's not necessarily the case. For example, consider IRC, once the bane of many college students' academic records: Many sites and services actually have negative value, by being addictive time sinks.
Economic theories tend to neglect considerations like people's self-destructive behavior; or they re-define it to make the theory work ("it's not a bug, it's a feature!"). The classic example is of a destructive drug habit.
The addictive element creates a larger user base, but its value is highly debatable: EverQuest was nicknamed EverCrack and World of Warcraft is similar; addictive elements also play into gambling sites, collectible card games, instant messaging, and even sites like Reddit. Anything that sucks up your attention and wastes your time is a net liability. Television sitcoms create the "value" of watching someone else's fake life by withdrawing your attention from your own, real one. (And it initiates a cycle, as the more you watch, the less of a real life you have, the more you'll turn to the comforting artificial alternatives.)
Thus, I don't subscribe to the idea that merely because people are using something, it must have value for them. It has value for the purveyor of the service or substance; and due to corporate self-interest, that is often confused in business with value for the user.
If lacing a drug with plutonium made it a hundred times more addictive, most corporations would have no problem selling radioactive crack (and killing off all their users), as long as it made the numbers work for this quarter.
If life is made torturous so that selling an anesthetic is big business, claiming it "creates value" is begging the question in accepting that life should be like that in the first place. Almost all mass media, including sports, and including the aforementioned addictive games and services, are forms of anesthesia.
The real value would be stopping the death by a thousand cuts, not anesthetizing ourselves to it.
The function of most of these sites is to acquire a large user base, so that it can later be monetized. Currently, the dominant strategy for doing so involves advertising, which means you want broad enough appeal to get large numbers of relative technical unsophisticates that aren't using AdBlock or similar.
The whole topic reminds me of Feynman's story about his father teaching him about how life on Earth moves because the Sun shines.
Advertising revenue is the solar energy incident on Earth of the web.